8-K: San Juan Basin Royalty Trust Suspends July Distribution Due to High Production Costs and Low Gas Prices

The San Juan Basin Royalty Trust will not distribute cash to unit holders for July 2024 due to production costs exceeding revenue in May 2024.

Summary

• The San Juan Basin Royalty Trust has announced it will not declare a cash distribution for July 2024.
• This decision is due to production costs exceeding proceeds during the production month of May 2024.
• Lower natural gas prices and increased production costs contributed to this shortfall.
• Hilcorp reported total revenue of $2,518,037 for May 2024, with $2,242,475 from gas and $275,562 from oil.
• Production costs for the same period were $6,183,810, including lease operating expenses, severance taxes, and capital costs.
• Excess production costs totaled approximately $4,888,522 gross ($3,666,391 net to the Trust).
• The Trust will not make distributions until future net proceeds cover liabilities and replenish cash reserves.
• The Trust's administrative expenses for the month were $53,688.
• Interest income of $6,482 was applied to these expenses, with the remaining balance covered by cash reserves.
• Gas volumes for May 2024 were 1,970,451 Mcf, with an average gas price of $1.14 per Mcf.
• The Trustee plans to replenish cash reserves to $2.0 million before resuming distributions.

Sentiment

Score: 3

Explanation: The sentiment is negative due to the suspension of distributions, high production costs, and reduced cash reserves. While the Trust is taking steps to address the issues, the immediate outlook is concerning for investors.

Positives

• The Trust is actively engaging with Hilcorp regarding accounting and reporting.
• The Trust's third-party auditors are auditing payments made by Hilcorp.
• The Trust is conducting a comprehensive audit process to ensure compliance with agreements.
• The Trustee is authorized to retain cash reserves for contingent liabilities.
• The Trust is taking steps to replenish cash reserves to $2.0 million.

Negatives

• No cash distribution will be made to unit holders for July 2024.
• Production costs significantly exceeded revenue in May 2024.
• The Trust's cash reserves have been reduced to cover administrative expenses.
• The average gas price decreased from $1.24 per Mcf in April to $1.14 per Mcf in May.
• Excess production costs of $3,666,391 net to the Trust will be charged to future distributions.

Risks

• The Trust is subject to the volatility of oil and gas prices.
• Governmental regulations or actions could impact the Trust.
• Litigation could pose a risk to the Trust.
• Uncertainties about estimates of reserves could affect future performance.
• The Trust is reliant on information provided by Hilcorp.

Future Outlook

The Trust will not make distributions until future net proceeds are sufficient to pay liabilities and replenish cash reserves, with a target of $2.0 million in cash reserves before resuming distributions. The Trust will continue to engage with Hilcorp and conduct audits.

Management Comments

• Argent Trust Company, as the trustee, reported that it will not declare a monthly cash distribution.
• The Trustee is authorized to retain a cash reserve for payment of Trust liabilities.
• The Trustee plans to replenish the cash reserves and increase them to $2.0 million.

Industry Context

The announcement reflects the challenges faced by royalty trusts in the current environment of fluctuating natural gas prices and increasing production costs. The need to manage cash reserves and ensure compliance with agreements is critical for the long-term viability of such trusts.

Comparison to Industry Standards

• Other royalty trusts and energy companies are also facing similar challenges with fluctuating commodity prices and rising operating costs.
• Companies like BP and Chevron have also reported increased capital expenditures in their recent reports.
• The average gas price of $1.14 per Mcf is below the average price for many other gas producing regions in the US.
• The level of production costs reported by Hilcorp is higher than some other operators in the region, indicating potential inefficiencies or higher capital expenditure requirements.

Stakeholder Impact

• Unit holders will not receive a cash distribution for July 2024.
• The Trust's employees and service providers may be impacted by the reduced cash flow.
• The Trust's creditors may be impacted by the reduced cash flow.
• The Trust's suppliers may be impacted by the reduced cash flow.

Next Steps

• The Trustee plans to replenish the cash reserves to $2.0 million.
• The Trust will continue to engage with Hilcorp regarding accounting and reporting.
• The Trust's third-party auditors will continue to audit payments made by Hilcorp.
• The Trust will continue its comprehensive audit process to ensure compliance with agreements.

Key Dates

Keywords

San Juan Basin Royalty Trust, Cash Distribution, Production Costs, Natural Gas Prices, Hilcorp, Trustee, Oil Revenue, Gas Revenue, Cash Reserves, Audit